Three Out of Four of the Last School Construction/Remodeling projects experienced Significant Cost Overruns
Financial Projections Manipulated to Understate Upcoming Capital and Operating Costs
By Ira Kaylin
Ira Kaylin is a former Council Member. He served as the Chair of the Economic Development Committee, Co-Chair of the Budget and Finance Committee and had served as Chief Financial Risk Officer of the Inter American Development Bank
The City Manager has produced draft language for the planned November Referendum which would authorize the borrowing of $120-$130 million for School Construction and Furnishings for a new GMHS.
The document is profoundly misleading due to a combination of mis-information and assumptions that defy any rational analysis.
The article will be presented in two parts: the first part reviews past School construction performance. The second part is forward looking; it describes the financial impact of approving a $120-$130 million Bond authorization.
It will be argued that the Referendum language and assumptions are a one sided advocacy piece rather than neutral.
The key paragraph in the draft language is the following:
FISCAL IMPACT: Assuming all bond-funded CIP projects and equipment are issued, 59 the addition of the GMHS/MEHMS project at the recommended amount could:
60 • Add $10.9M in additional new debt service beginning in FY2019
61 • Up to $0.20 in real estate tax rate or $1,600 in additional real estate tax for the
62 median homeowner;
63 • cause the City to exceed its current policy for debt service to expenditures ratio
64 of 12% by up to 17% over a five-year period;
65 • impact credit rating due to the magnitude of the debt;
66 • Significantly reduce debt capacity in future years;
67 • Require additional funding for the unassigned fund balance so that we continue
68 to meet our target of 17% of expenditures including debt service.
70 The sale or lease of the land may mitigate the amount necessary to be funded by the
71 taxpayer as much as 4-6 cents.
73 Estimates of fiscal impact are subject to the following risks:
75 • Interest rate risk –the bond(s) will be issued at a rate higher than projected. In
76 our models, we have projected interest rates of 3.5% to 5%. Market factors, as
77 well as our credit rating at the time of issuance could affect the interest rate.
78 • Cost escalation risk –the cost of the project may increase if there are significant
79 delays to the construction. (TO17-11)
80 • Operating cost increase risk – the operating costs other than debt service for the
81 expanded building could be higher than normal revenue growth. In our models,
82 we have assumed that such operating costs will be no more than revenue growth.
83 • Economic risk –the economy and real estate assessed values may grow at a
84 slower rate than anticipated (modeled at 2.5%) or actually shrink.
The two key (lines 78 to 84) points are those in bold type. The first part will address the issue of “Cost Escalation Risk”.
Cost Escalation Risk
The manner in which this issue is addressed leaves the impression that project delays simply occur. Saying that the project delays lead to cost overruns is an observation that is largely without meaning. Delays almost never lead to cost savings and it very rare that delays are cost neutral. What are essential are root causes of the delays.
The underlying cause of the delays appears to be poor planning, poor oversight, and budget manipulation by the School Division. Understandably that should not be part of the Referendum language but it is something that residents should be aware of before they decide if the School Division is up to the task. Past performance conclusively demonstrates that a project the size of a new GMHS is beyond the capability of the School Board.
Based on a FOIA analysis, the key driver of cost increases is not due to spontaneous construction delays, but rather by systemic mismanagement and demonstrably false information.
The examples that follow need to be understood in context.
As part of the promotion of the FY 16 Budget the School Board produced a document called RAFT which was a status report of the last four remodeling/expansion school projects, The following is the School Board produced summary:
“School construction has been cost effective and on budget.
- MEH – Returned Cost Savings
- TJ – Returned Cost Savings
- Thackeray – Built on Budget. No overruns.
- Mount Daniel – Right on schedule”
Based on a FOIA response from the City’s then CFO it was clearly stated that no money had been returned to the City. If there were any savings they were retained by the School Division.
Point 4. goes to the point that the School Division is fully capable of providing false information
1) The Thackery School went from an original cost estimate of $50,000 which immediately increased $126,000 to a final cost of $2.2 million. The increase from $126,000 to $2.2 million represents a 17 fold increase. All of these cost increases were based on what is called “change orders”, of which there were, at least 4. “Change orders” occur when there is a deviation from originally approved plans to amended or adjusted designs.
Remodeling/Expansion of TJ
2) In order to avoid triggering a Referendum for the remodeling and expansion of TJ the cost estimate was placed at under 10% of budget expenditures (the Referendum trigger). However, in order to stay under the trigger, the cost estimate used by the Schools did not include the cost of replacing the existing TJ HVAC which was, at that time, already beyond its useful life. As a result The School Division came back two years later and asked for additional funds, approximately $2 million, to replace the existing HVAC. Thus the cost savings of doing two HVACs at the same time was lost.
For those who believe the failure to take into account the need to replace the existing HVAC was an honest mistake would suggest the School Board was either openly mislead by their design/ build consulting firm or speaks to an irremediable incompetence. Neither alternative is likely.
The MT. Daniel Fiasco
3) The Mt. Daniel renovation/expansion Referendum was presented as one of those “life on earth, as we know it will end” needs. Among the most immediate needs was the installation of a sprinkler system in order to ensure student safety.
The cost overruns due to project execution delay are over 20%. Somehow the negative consequences of the delay seem to have disappeared once it was shown that it was the School Board’s failure to reach agreement with our Fairfax neighbors (which our citizens had been told by school officials had been taken care of), was the cause of project delays and ensuing cost increases.
In other words, the projected dire consequences of not moving quickly disappeared once it became clear that the chief culprit was the School Board itself.
Root Cause Analysis
The School Division does not appear to have produced any public reports on the above projects that would identify what went wrong, certainly not for the Mr. Daniel project. Clearly a problem can not be addressed if there is no admission that a problem exists.
If the School Division is the lead agency in any new GMHS project, especially the size approved by the School Board, there is a 100% certainty that there will be cost overruns/change orders.
Finally, as regards to construction updates, the School Division’s credibility in providing timely and accurate information is near zero.
Part 2 will be published shortly